(Volume 16, Number 2) JUNE 1996
Route To: Manager, Muni Department Trading Sales Operations Compliance
Amendment Approved The amendment provides that, when reporting inter-dealer transactions under the Board's Transaction Reporting Program, the time of trade execution must be reported along with the other trade information required by rule G-14.
Questions about the amendment may be directed to Larry M. Lawrence, Policy and Technology Advisor.
On April 16, 1996, the Securities and Exchange Commission approved an amendment to the rule G-14 transaction reporting procedures that requires dealers to include the time of trade execution when submitting information on inter-dealer transactions to the Board. Information on the time of trade execution will be made available to the Commission and to organizations charged with inspection for compliance with, and enforcement of, Board rules, for purposes of establishing audit trails. The time-of-trade reporting requirement becomes effective on July 1, 1996.
The goals of the Board's transaction reporting program are to help provide market participants and the public with more information about the value of securities, and to help enforcement agencies identify transaction patterns as they carry out dealer inspections and conduct market surveillance. Phase I of the program has been operational since January 23, 1995. Each day, the Phase I automated system has produced a report of price and volume of inter-dealer transactions in municipal securities that were executed the previous business day. In addition to the transparency component which produces these daily reports, the system has a second component, a surveillance database of detailed records about every inter-dealer transaction that has been successfully compared by the automated comparison system. The surveillance database includes, among other things, the price and volume of each compared transaction, the trade date, identification of the security traded, and identification of all parties to each compared transaction. This information is intended to enable the enforcement agencies to construct audit trails of inter-dealer transactions. The Board has provided on-line access to the surveillance database to the National Association of Securities Dealers, Inc. (NASD) and is making information from the surveillance database available to all the agencies responsible for enforcing Board rules.
The input stream for inter-dealer transaction reporting is information reported by dealers, pursuant to rule G-14, to the Board through the automated comparison system. The Board has designated National Securities Clearing Corporation (NSCC), the central facilities provider of the automated comparison system, as its agent for receiving inter-dealer transaction information.
The SEC has noted the need to make an "integrated audit trail" of transaction information available to the enforcement agencies. The SEC has expressed its belief that an audit trail will "provide valuable information for market surveillance and inspection purposes to the MSRB, the Commission, the NASD, and the relevant banking agencies."
Rule G-14, as amended, will help to ensure that the audit trail information in the surveillance database includes the time of execution of each compared inter-dealer municipal securities transaction. Enforcement agencies are expected to utilize the time-of-trade information when examining a series of transactions in a given municipal security. The information currently available from the surveillance database enables regulatory personnel to determine the date on which a trade or group of trades was executed; the addition of time-of-trade will help reconstruct the sequence of trades during the day. Among other things, this will help enforcement agencies interpret changing price patterns as a security is traded during the day.
Under the amended transaction reporting procedures, each dealer reporting inter-dealer transactions to the Board must include the time of execution with each transaction submitted to the automated comparison system. The time, accurate to the nearest minute, will be reported as Eastern time. The time-of-trade will be reported by both the buyer and seller, to ensure that time-of-trade is available for all transactions, even when one "side" does not report the trade on the night of trade date.
As the amendment becomes effective on July 1, 1996, dealers must report the time of trade execution for all trades done on or after that date. This requires that dealers use a new trade input format for the automated comparison system. NSCC currently is testing with dealers the system changes needed to incorporate this new function. The Board encourages dealers to make any internal system changes at this time that are necessary to provide this information and to test them with NSCC as soon as possible.
Rule G-14. Reports of Sales or Purchases (a)-(b) No change.
Rule G-14 Transaction Reporting Procedures (a) Inter-Dealer Transactions. (i) Except as described in paragraph (ii) of this section (a), each broker, dealer and municipal securities dealer shall report all transactions with other brokers, dealers or municipal securities dealers to the Board's designee for receiving such transaction information. The Board has designated National Securities Clearing Corporation (NSCC) for this purpose. A broker, dealer or municipal securities dealer shall report a transaction by submitting or causing to be submitted to NSCC information in such format and within such time frame as required by NSCC to produce a compared trade for the transaction in the initial comparison cycle on the night of trade date in the automated comparison system operated by NSCC. Such transaction information may be submitted to NSCC directly or to another registered clearing agency linked for the purpose of automated comparison with NSCC. The broker, dealer or municipal securities dealer may employ an agent that is a member of NSCC or a registered clearing agency for the purpose of submitting transaction information; however, the primary responsibility for timely and accurate submission continues to rest with the broker, dealer or municipal securities dealer that executed the transaction.
The information submitted in accordance with this procedure shall include *the time of trade execution and* the identity of the brokers, dealers or municipal securities dealers that execute the transaction in addition to the identity of the entities that clear the transaction. If clearing/introducing broker arrangements are used for a transaction, the introducing brokers shall be identified as the "executing brokers." If the settlement date of a transaction is known by the broker, dealer or municipal securities dealer, the report made to NSCC also shall include a value for accrued interest in the format prescribed by NSCC.
(ii) No change.
April 16, 1996
 See Securities and Exchange Act Release No. 34-37116 (April 18, 1996).
 For a description of the program, see "Reporting Inter-Dealer Transactions to the Board: Rule G-14," MSRB Reports, Vol. 14, No. 5 (December 1994), at 3-6.
 Securities Exchange Act Release No. 34955 (November 9, 1994) at 19.
 The time-of-trade will not be used to match submissions during the comparison process nor will it be made public in the daily reports.
 Rule G-14 Transaction Reporting Procedures stipulate that the broker, dealer or municipal securities dealer may employ an agent that is a member of NSCC or a registered clearing agency for the purpose of submitting transaction information; however, the primary responsibility for timely and accurate submission continues to rest with the broker, dealer or municipal securities dealer that executed the transaction.
 The Board has noted that there may be "extraordinary circumstances when it is impossible to determine the exact time of execution." (MSRB Interpretation of July 29, 1977 regarding rules G-8(a)(vi) and (vii), MSRB Manual (CCH), para. 3536 [emphasis added].) In such cases, the dealer may report an approximation of the time of execution with transaction reporting information.
 Requiring both the buyer and seller to report time-of-trade will ensure its presence in the surveillance database for those transactions where advisories are "stamped" in the automated comparison system. In "stamping" an advisory of a transaction to achieve comparison, one party indicates agreement with the transaction information submitted by the other party. If time-of-trade information were to be required of the party on only one side of the trade, transactions "stamped" by that party would not include any time-of-trade information for reporting purposes. In certain limited cases, involving syndicate transactions, however, NSCC comparison procedures require a submission only from one dealer: the syndicate manager. Accordingly, only the syndicate manager is required in such a case to report the trade to the Board, and only that dealer would report the time-of-trade under the amendment.
 See "Fixed Income Transaction System: MSRB Requirement for Time-of-Trade Submission Testing," NSCC Important Notice A4405 (March 27, 1996) and Important Notice A4370 (February 6, 1996).
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